Agency problems

Explain why each of the following situations is an agency problem and what costs to the firm might result from it. Suggest how the problem might be dealt with short of firing the individual(s) involved.
a.  The front desk receptionist routinely takes an extra 20 minutes of lunchtime to run personal errands.
b.  Division managers are padding cost estimates to show short-term efficiency gains when the costs come in lower than the estimates.
c.  The firm’s chief executive officer has had secret talks with a competitor about the possibility of a merger in which she would become the CEO of the combined firms.
d.  A branch manager lays off experienced full-time employees and staffs customer service positions with part-time or temporary workers to lower employment costs and raise this year’s branch profit. The manager’s bonus is based on profitability

Sample Solution